The Vatican Mandate, SMAs And ESG investing

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Last Friday morning, the Vatican put out communications urging Catholics and the private sector to “progressively and without delay” divest from fossil fuel producers and other entities that perpetuate climate change. The pope called on Catholics to avoid “support for companies harmful to human or social ecology,” such as weapon makers and abortion providers, as well as the fossil fuel industry.

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But what do financial advisors and investment managers say?

  • Does ESG investing (a.k.a., impact investing, socially responsible investing, etc.) make a difference?
  • What about using SMAs to screen out certain stocks and bonds?
  • Does being a shareholder of the offensive companies help or hinder ethical concerns?

Here  are comments from financial advisor, Haleh Moddasser, CPA, a partner and SVP at Stearns Financial Group based in North Carolina (a Registered Investment Advisory firm managing over $1Billion for its private clients), who says that divesting is a bad idea because people who are opposed to say, fossil fuels, can affect the change they want to see by retaining voting rights. This stance is especially interesting because Ms. Moddasser just published a book called Women On Top: Women, Wealth and Social Change.

Moddasser says in response to the Vatican mandate:

Divestment is a highly charged issue. And my comments may appear to be on the “wrong side” of the popular movement against climate change; however, divesting fossil fuel stocks may, at best, help an investor "feel" socially responsible, but, at worse, eliminate any chance this investor has of actually impacting corporate behavior. This is because an investor gives up his seat at the table when he or she no longer owns shares in a company stock. No longer can the investor vote on corporate resolutions. And No longer can the investor participate in shareholder resolutions demanding change. No longer can the investor exert influence over the company to develop cleaner sources of energy.

Some argue that selling shares robs these companies from the capital they need to continue building their infrastructure. However, on average, over 6 billion shares of stock are sold daily. When an investor sells his or her shares, by definition, someone else is buying them. In no way does this “injure” the company, as these shares are sold on the secondary market to other investors. The company received their capital when the shares were first made public, during an IPO. In fact, the company has no idea whether their shares are being traded as a simple portfolio rebalancing move, or as a statement against climate change. Further, only 10% of all oil production is through public companies. The other 90% of oil production is at the hands of national, state owned companies such as Saudi Aramco and Iranian Oil, the Chinese and Venezuelans. These companies cannot be influenced by divestment, since there are no public shares.

My suggestion for anyone who is truly interested in reducing climate change resulting from the use of oil is to hold shares in companies whose behavior you want to change. In the case of climate change, the goal would be to influence oil companies to develop alternate, cleaner sources of energy. At the end of the day, it is the world’s reliance on oil that is driving demand. Until there is a better alternative, in the form of cleaner energy or alternate technologies, this problem will not go away. 

Charles D. Etzweiler, MBA, CIMA®, CFP®, CMT, Chief Research Officer & Senior Vice President at SEC Registered Investment Advisory firm, NEPSIS, Inc., a fee-only financial advisor and wealth management firm investing long-term into equity, and co-host of the radio show:, based in Minneapolis, says that SMAs could be the answer.

The great attributes of SMAs - Etzweiler says in response to the Vatican's call-to-action:

One of the great attributes of Separately Managed Accounts (SMAs) is the ability to customize investor portfolios allowing for greater flexibility and transparency. Because SMAs are managed directly at the client level, unlike mutual funds or ETFs, their holdings can accommodate clients who may have special requests like those in ESG investing. Moreover, because Socially Responsible Investing takes many forms, SMAs permit a fund manager and client the latitude to collaborate on each holding and how they interact in creating the most desirable portfolio possible.

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